If he weren't so busy running the nation's most profitable electric company, Exelon (EXC
) Chairman and Chief Executive John W. Rowe might be auditioning for a remake of And Then There Were None. One by one, many of his peers at rival companies have been felled over the past 18 months. Yet Rowe, 57, is still standing.
Unlike the Agatha Christie story, however, there's little mystery about who done it. His competitors did themselves in -- by botching investments in foreign power plants, chasing a fast buck in energy-trading scams, or saddling themselves with new facilities in the U.S. just as demand slumped.
Rowe admits to his share of mistakes, too. Exelon took a $230 million charge in 2002 to account for failed ventures in telecom, among other things. Mostly, though, the Chicago company -- formed in 2000 by the merger of Chicago's Unicom Corp. and PECO Energy Co. of Philadelphia -- has held up well. It has stuck to the basics of priming its fleet of facilities to produce up to 43,000 megawatts -- 60% of it from nuclear plants -- and selling it through its own regulated utilities or on the wholesale market. The bottom line: On $15 billion in revenues last year, Exelon netted $1.44 billion, an industry high. Rowe talked with BusinessWeek senior correspondent Michael Arndt recently about his strategy for survival in an unforgiving time.
Q:Give me your take on the economy today. A: There's at least another year or year and a half before we start seeing things get a lot better. The fundamental issue is we're still getting over the hangover after the boom. We had three years -- 1998, 1999, and 2000 -- that looked too good to be true, and were. A lot of us are doing more moping than we really deserve to do, because we're no longer in the boom.
Q:What does this mean for power prices? A: Wholesale prices have been far lower than we anticipated three years ago. Prices today are in the $20-to-$25-per-megawatt-hour rate. That's at least $6 [per Mwh] below our expectation. We believe that the market for wholesale power will be a classic commodity cycle, with relatively short periods of booms in prices, perhaps one to three years, followed by longer periods of busts in prices, perhaps four to six years.
Q:How does Exelon get through a period like this? A: We survive by cutting costs, by constantly looking for ways to make a little bit more money, and by frankly accepting that we don't have the earnings growth we would have in better times. Everyone in business has a strategic image. They see themselves as eagles or falcons or tigers. Utilities are ugly, old mules, but you still need them. And it's better to be a good mule than a bad racehorse. I don't mind having long ears.
Q:You achieved $300 million in savings last year. How much more can you save in 2003? A: We spend almost $6 billion a year in cash on everything. We believe we could find 5% to 10% of additional savings. For example, we've looked at our supply chain. We have over 900 employees working in that area, and the total amount spent is about $2 billion a year. There are opportunities to save $100 million there, and the number could be as high as $200 million. What we're really doing is using the economic pressure we're under to force more change in how we do things.
Q:You've shed 18% of your premerger workforce, or about 4,000 posts. But at some point, you can't keep cutting because there's nothing left to cut. A: You're right. We have to have revenue growth to prosper. And there are two ways that will happen. First, we expect that wholesale prices will recover sometime in 2005 to 2007. And second, we think that if we can maintain our performance, we should be able to make some acquisitions, preferably an integrated utility, which generates and sells power over its own wires. But if the price goes low enough, we perhaps could acquire more merchant power-generation, to sell output to others on the unregulated, wholesale market.
Q:So you're still in the hunt for more acquisitions? A: We're always looking, and we're never rabid about it. Because one of the lessons of the last three years is that people who put growth ahead of value ended up getting neither. We believe that the original merger between Unicom and PECO was very successful. But once you go past that, our acquisitions have a spotty track record. We haven't been immune to the problems associated with overestimating power prices and the value of power plants.
Q:Have there been other success stories, though? A: Our single best acquisition was PECO's 50-50 joint venture with British Energy in AmerGen Energy in 1997. That's been a real money-maker. But our merchant power acquisitions are hurting us. We acquired 50% of Sithe Energy in 2000 for $682 million and its entire New England subsidiary last November for an additional $543 million, plus $1.2 billion in debt. We're expecting Sithe alone to lower our earnings by at least 20 cents a share this year. The difference between us and some other folks is that we made fewer mistakes and fewer big ones.
Q:Are you open to selling assets as well? A: Any time you won't sell, you're not a business, you're a church. I am not qualified to be a cardinal. We know we don't do it all right all the time. Some of our mistakes cost a lot of money. But our wins have made us even more money. I've been running utilities for 19 years, and in that time, virtually every grand vision that has come along has led to failure within less than five years. Just constantly plugging away at value has worked for us.
Q:What about security? How vulnerable are your nuclear plants and the grid that connects them? A: I believe my nuclear facilities to be the best-protected civilian targets there are. Since September 11, we have better security procedures. We have more diligent guards than any other civilian facility that I know of. And the Electric Power Research Institute has evaluated nuclear facilities' ability to survive hits by fully fuel-loaded airplanes. It's reassuring, because they pass [the test] even though they weren't designed to take a crash like that in the original designs.
There is no way to provide similar protection to the whole power grid. Fortunately, most kinds of attacks on electricity grids threaten only short-term disruptions. Exelon alone has 100,000 miles of wires. You can't wrap concrete around all of it.
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